Gurukripa s Guideline Answers to Nov 2015 Exam Questions CA Inter (IPC) Cost Accounting & Financial Management

Gurukripa s Guideline Answers to Nov 2015 Exam Questions CA Inter (IPC) Cost Accounting & Financial Management Question No.1 is compulsory (4 5 = 20 Marks). Answer any five questions from the remaining six questions (16 5 = 80 Marks). [Answer any 4 out of 5 in Q.7] Working Notes should form part of the answers. Note: Numbers for Page References are given as under Book Title Padhuka s Students Handbook on Cost Accounting and Financial Management Padhuka s Cost Accounting and Financial Management A Practical Guide Referred as Handbook Prac. Guide Question 1(a): Labour Turnover Rates 5 Marks Human Resources Department of A Ltd computed Labour Turnover by Replacement Method at 3% for the quarter ended June 2015. During the quarter, fresh recruitment of 40 workers was made. The number of workers at the beginning and end of the quarter was 990 and 1010 respectively. You are required to calculate the Labour Turnover Rate by Separation Method and Flux Method. (a) L = Average Labour Force = Similar to Principles/ Computations in Page No.3.25, Q.No.5 & 6 of Handbook 990 1,010 2 = 1,000 R R (b) Labour Turnover by Replacement Method = 3% (Given). So, = =3%. So, R = 30. L 1,000 (c) A (Accessions) = Replacements + New Recruitments = R + N = 30 + 40 = 70 (d) Also, A = No. of Workers at the end of the Period + No. of Separations ( ) No of Workers at the Beginning of the Period From the above equation, 70 = 1,010 + S ( ) 990. So, S = 50 (e) Labour Turnover Rates are computed as under (i) Separation Method: S 50 S R N 50 30 = = 5% (ii) Flux Method: = L 1,000 L 1,000 40 = 12% Question 1(b): Marginal Costing Basic Computations 5 Marks A Company gives the following information: Margin of Safety ` 3,75,000 Margin of Safety (Quantity) 15,000 units Total Cost ` 3,87,500 Break Even Sales in Units 5,000 units Calculate (i) Selling Price per unit, (ii) Profit, (iii) Profit / Volume Ratio, (iv) Break Even Sales (in Rupees), and (v) Fixed Cost. Similar to Principles/ Computations in Page No.11.14 Illustrations of Handbook MOS Amount ` 3,75,000 1. Sale Price p.u. = = ` 25 pu MOS Quantity 1,500Units 2. Profit = Total Sales ( ) Total Cost [Note: Total Sales = BES + MOS = 15,000+5,000 = 20,000 units) = (15,000 + 5,000) units ` 25 3,87,500 = ` 1,12,500 3. Also, Profit = MOS Quantity Contribution p.u. On substitution, 1,12,500 = 15,000 units Contribution p.u. So, Contribution p.u. = ` 7.50 Hence PVR = Contribution p.u Sale Price p.u 7.5 = = 30% 25 4. BES in ` = BES Quantity Sale Price p.u. = 5,000 units ` 25 = ` 1,25,000 5. At BEP, Total Contribution = Fixed Cost. Total Contribution at BEP = 5,000 units ` 7.50 p.u. So, Fixed Cost = ` 37,500 Nov 2015.1

Question 1(c): Leverage Reverse Working to prepare Income Statement From the following details of X Ltd, prepare the Income Statement for the year ended 31 st December 2014: Financial Leverage 2 Interest ` 2,000 Operating Leverage 3 Variable Cost as a Percentage of Sales 75% Income Tax Rate 30% 5 Marks Similar to Page No.17.18, Q.No.18 [N 09 Qn] of Handbook, and Page No.17.11, Q.No.24 & 25 of Practical Guide Income Statement Particulars ` Sales (WN 3) 48,000 Less: Variable Cost (WN 3) Given = 75% = (36,000) Contribution (WN 2) 12,000 Less: Fixed Cost (WN 2) (8,000) EBIT (WN 1) 4,000 Less: Interest (given) (2,000) EBT (WN 1) 2,000 Less: Tax at 30% on EBT (600) EAT (EBT less Tax) 1,400 Notes: EBIT EBT Interest EBT 2,000 2 1. DFL = = = =. So, we have EBT + ` 2000 = 2 EBT. EBT EBT EBT 1 On solving, we get EBT = ` 2,000, and EBIT = EBT + Interest = ` 2000 + ` 2000 = ` 4,000. Contribution Contribution 3 2. DOL = = =. So, Contribution = ` 4,000 3 = ` 12,000. EBIT 4,000 1 Hence, Fixed Costs = Contribution less EBT = ` 1,2000 ` 4,000 = ` 8,000. 3. Variable Costs = 75%. So, PV Ratio = 100% 75% = 25%. Contribution 12,000 So, Sales = = = ` 48,000. PVR 25% Question 1(d): Cost of Debt 5 Marks A Company issues 25,000, 14% Debentures of ` 1,000 each. The Debentures are redeemable after the expiry period of 5 years. Tax Rate applicable to the Company is 35% (including Surcharge and Education Cess). Calculate the Cost of Debt after tax, if Debentures are issued at 5% Discount with 2% Floatation Cost. Similar to Page No.18.16, Q.No.2 Handbook [M 06 Qn] Particulars ` in Crores 1. Gross Proceeds [25,000 Debentures (` 1,000 5% Discount)] 23.750 2. Floatation Cost at 2% 0.475 3. Net Proceeds (1 2) 23.275 4. Redemption Value (Assumed that the Debentures are redeemed at par.) 25.000 5. Average Liability = ( 4) (3) 2 24.138 6. Post Tax Interest = Interest (100% Tax Rate 35%) = ` 25 Crores 14% 65% 2.275 9. K d = (6) (5) 9.425% Post Tax Interest Note: Alternatively, K d may also be computed as Net Proceeds = 9.77% (ignoring the Redemption Value). Nov 2015.2

Question 2(a): Cost Sheet / Job Costing ML Auto Ltd is a Manufacturer of auto components and the details of its expenses for the year 2014 are given below: (i) Opening Stock of Material ` 1,50,000 (ii) Closing Stock of Material ` 2,00,000 (iii) Purchase of Material ` 18,50,000 (iv) Direct Labour ` 9,50,000 (v) Factory Overhead ` 3,80,000 (vi) Administrative Overhead ` 2,50,400 During 2015, the Company has received an order from a Car Manufacturer where it estimates that the Cost of Material and Labour will be ` 8,00,000 and ` 4,50,000 respectively. ML Auto Ltd charges Factory Overhead as a Percentage of Direct Labour and Administrative Overhead as a Percentage of Factory Cost based on previous year s cost. Cost of Delivery of the components at Customer s Premises is estimated at ` 45,000. You are required to (i) Calculate the Overhead Recovery Rates based on Actual Costs for 2014. (ii) Prepare a detailed Cost Statement for the order received in 2015 and the price to be quoted if the Company wants to earn a Profit of 10% on Sales. Similar to Page No.1.26, Q.No.5 of Handbook Particulars 2014 Actuals Computations 2015 Estimates Direct Materials (Note) 18,00,000 Given 8,00,000 Direct Labour 9,50,000 Given 4,50,000 Prime Cost 27,50,000 Total of above 12,50,000 POH 3,80,000 Add: POH 3,80,000 = = 40% of Labour 40% of 4,50,000 Labour 9,50,000 = 1,80,000 Factory Cost 31,30,000 Total of above 14,30,000 AOH 2,50,400 Add: AOH 2,50,400 = = 8% of Fy.Cost 8% of 14,30,000 Factory Cost 31,30,000 = 1,14,400 Cost of Production 33,80,400 Total of above 15,44,400 Add: SOH = Delivery Costs Given 45,000 Cost of Sales Total of Cost as above 15,89,400 Add: Profit 1/10 th on Sales = 1/9 th on Cost = 1,76,600 Sale Price 17,66,000 Note: Direct Materials Consumed for 2014 = Opening Stock + Purchases ( ) Closing Stock = ` 1,50,000 + ` 18,50,000 ` 2,00,000 = ` 18,00,000 Question 2(b): Ratio Analysis Profit & Loss Statement VRA Limited has provided the following information for the year ending 31 st March 2015. Debt Equity Ratio 2 : 1 Income Tax Rate 35% 14% Long Term Debt ` 50,00,000 Capital Turnover Ratio 1.2 times Gross Profit Ratio 30% Opening Stock ` 4,50,000 Return on Equity 50% Closing Stock 8% of Sales You are required to prepare Trading and Profit and Loss Account for the year ending 31 st March 2015. Similar to Page No.14.21, Illustrations of Handbook Trading and Profit & Loss Account for the year ending 31 st March 2015 Particulars ` Particulars ` To Opening Stock (Given) 4,50,000 By Sales (WN 1) 90,00,000 To Purchases (bal. fig) 65,70,000 By Closing Stock (WN 1) 7,20,000 To Gross Profit (30% on Sales) 27,00,000 Total 97,20,000 Total 97,20,000 To Other Expenses (bal. fig) 76,923 By Gross Profit b/d 27,00,000 To Net Profit EBIT c/d (WN 2) 26,23,077 Nov 2015.3

Particulars ` Particulars ` Total 27,00,000 Total 27,00,000 To Interest on Debt at 14% (WN 2) 7,00,000 By EBIT b/d (WN 2) 26,23,077 To Tax at 35% of 19,23,077 6,73,077 To Net Profit (EAT) (WN 2) 12,50,000 Working Notes: Debt (a) Debt Equity Ratio = Equity Total 26,23,077 Total 26,23,077 1. Computation of Sales & Closing Stock 50,00,000 2 = = So, Equity = ` 25,00,000 Equity 1 (b) So, Total Capital Employed = Debt + Equity = 50,00,000 + 25,00,000 = ` 75,00,000 (c) Capital Turnover Ratio = Turnover Capital Employed Turnover = 75,00,000 (d) Closing Stock = 8% of Sales = ` 90,00,000 8% = ` 7,20,000 = 1.2. Hence Turnover = ` 75,00,000 1.2 = ` 90,00,000. 2. Computation of EBIT EAT (a) Return on Equity (assumed Post Tax) = = 50%. So, EAT = 50% of 25,00,000 (Equity) = ` 12,50,000. Equity 12,50,000 (b) Since Tax Rate is 35%, EAT represents 100% 35% = 65% of EBT. So, EBT= = ` 19,23,077. 65% (c) Interest = ` 50,00,000 14% = ` 7,00,000 (d) EBIT = EBT + Interest = 19,23,077 + 7,00,000 = ` 26,23,077 Note: If ROE is assumed as Pre Tax, the above numbers will stand modified as EBT = ` 12,50,000, Tax = ` 4,37,500, EAT = ` 8,12,500, EBIT = ` 19,50,000, and Other Expenses as per P&L = ` 7,50,000. Question 3(a): Budgeting Sales Budget XY Co. Ltd manufactures two products, viz. X and Y and sells them through two divisions, East and West. For the purpose of Sales Budget to the Budget Committee, following information has been made available for the year 2014 2015: Product Budgeted Sales Actual Sales East Division West Division East Division West Division X 400 units at ` 9 600 units at ` 9 500 units at ` 9 700 units at ` 9 Y 300 units at ` 21 500 units at ` 21 200 units at ` 21 400 units at ` 21 Adequate market studies reveal that Product X is popular but under priced. It is expected that if the Price of X is increased by ` 1, it will find a ready market. On the other hand, Y is overpriced and if the Price of Y is reduced by ` 1, it will have more demand in the market. The Company Management has agreed for the aforesaid price changes. On the basis of these price changes and the reports of salesmen, following estimates have been prepared by the Divisional Managers: Percentage Increase in Sales over Budgeted Sales Product East Division West Division X + 10% +5% Y + 20% + 10% With the help of intensive Advertisement Campaign, following additional sales (over and above the above mentioned estimated sales by Divisional Managers) are possible: Product East Division West Division X 60 units 70 units Y 40 units 50 units You are required to prepare Sales Budget for 2015 2016 after incorporating above estimates and also show the Budgeted Sales and Actual Sales of 2014 2015. Nov 2015.4

Similar to Principles discussed in Page 12.8 of Handbook Product X 1. Sales Budget for FY 2015 2016 Particulars East Division West Division Total Budgeted Quantity of 2014 2015 400 600 1,000 Add: Increase due to Price change 10%= 40 5% = 30 70 Add: Increase due to Advertisement Campaign 60 70 130 Product Y Budgeted Quantity of 2015 2016 500 700 1,200 Price for 2015 2016 9+1 = ` 10 9+1 = ` 10 Budgeted Sales Value for 2015 2016 ` 5,000 ` 7,000 ` 12,000 Budgeted quantity of 2014 2015 300 500 800 Add: Increase due to Price change 20%= 60 10% = 50 110 Add: Increase due to Advertisement Campaign 40 50 90 Budgeted Quantity of 2015 2016 400 600 1,000 Price for 2015 2016 21 1 = ` 20 21 1 = ` 20 Budgeted Sales Value for 2015 2016 ` 8,000 ` 12,000 ` 20,000 2. Budgeted and Actual Sales for FY 2014 2015 Particulars East Division West Division Total Budgeted Sales of X 400 ` 9 = 3,600 600 ` 9 = 5,400 ` 9,000 of Y 300 ` 21 = 6,300 500 ` 21 = 10,500 ` 16,800 Total ` 9,900 ` 15,900 ` 25,800 Actual Sales of X 500 ` 9 = 4,500 700 ` 9 = 6,300 ` 10,800 of Y 200 ` 21 = 4,200 400 ` 21 = 8,400 ` 12,600 Total ` 8,700 ` 14,700 ` 23,400 Question 3(b): Cash Flow Statement Balance Sheets of KAS Limited as on 31 st March, 2014 and 31 st March, 2015 are furnished below: (Amount in `) Liabilities 31.03.2014 31.03.2015 Assets 31.03.2014 31.03.2015 Equity Share Capital 75,00,000 1,02,50,000 Goodwill 10,00,000 7,75,000 General Reserve 42,50,000 50,00,000 Land & Building 68,00,000 61,20,000 Profit & Loss Account 15,00,000 18,75,000 Plant & Machinery 75,12,000 1,07,95,000 13% Debentures of FV ` 100 each 58,00,000 43,50,000 Investments 25,00,000 21,25,000 Current Liabilities 30,00,000 32,50,000 Stock 33,00,000 27,50,000 Proposed Dividend 7,50,000 9,10,000 Debtors 24,45,000 36,20,000 Provisions for Income Tax 22,50,000 24,75,000 Cash and Bank 14,93,000 19,25,000 Total 2,50,50,000 2,81,10,000 Total 2,05,50,000 2,81,10,000 The following additional information is available: (i) During the Financial Year 2014 2015, the Company issued Equity Shares at par. (ii) Debentures were redeemed on 1 st April 2014 at a Premium of 10%. (iii) Some Investments were sold at a Profit of ` 75,000 and the Profit was credited to General Reserve Account. (iv) During the year an old Machine Costing ` 23,50,000 was sold for ` 6,25,000. Its Written Down Value was ` 8,00,000. (v) Depreciation is to be provided on Plant and Machinery at 20% on the Opening Balance. (vi) There was no Purchase or Sale of Land and Buildings. (vii) Provision for Tax made during the year was ` 4,50,000. You are required to prepare a Cash Flow Statement for the year ended 31 st March 2015. Nov 2015.5

Similar to Page No.15.23, Q.No.7 of Practical Guide [N 08 Qn] 1. Plant and Machinery Account Particulars ` Particulars ` To balance b/d 75,12,000 By Bank A/c (Sale of Assets) 6,25,000 To Bank A/c (bal.figure Assets purchased) 55,85,400 By P&L A/c (Loss on Sale of Assets) 1,75,000 By Depreciation(20% on Opening Bal.) 15,02,400 By balance c/d (given) 1,07,95,000 Total 1,30,97,400 Total 1,30,97,400 2. Investments Account Particulars ` Particulars ` To balance b/d 25,00,000 By Bank A/c (bal.fig investments sold) 4,50,000 To Profit on Sale of Investments Transfer to GR 75,000 By balance c/d 21,25,000 Total 25,75,000 Total 25,75,000 3. Provision for Taxation Account Particulars ` Particulars ` To Bank Tax paid during the year (bal.fig) 2,25,000 By balance b/d 22,50,000 To balance c/d 24,75,000 By P&L Current Year Provn for Txn 4,50,000 Total 27,00,000 Total 27,00,000 4. Cash Flow Statement for the year ended 31 st March 2015 Particulars ` ` A. CASH FLOW FROM OPERATING ACTIVITIES: Profit made during the year = Increase in P&L A/c bal. = ` 18,75,000 ` 15,00,000 3,75,000 Add: Provision for Taxation for the year 4,50,000 Proposed Dividends (for Year 2015) 9,10,000 Transfer to Reserve during the year (` 50,00,000 ` 42,50,000 ` 75,000) 6,75,000 Net Profit before Taxation 24,10,000 Add back: Goodwill written off (` 10,00,000 ` 7,75,000) 2,25,000 Depreciation on Plant and Machinery (WN 1) 15,02,400 Depreciation on Building (` 68,00,000 ` 61,20,000) 6,80,000 Loss on Sale of Machinery (WN 1) 1,75,000 Prem. on Redemption of Debentures (` 58,00,000 ` 43,50,000) 10% 1,45,000 Operating Profit before Working Capital changes 51,37,400 Add / Less: Adjustments for changes in Current Assets / Liabilities Decrease in Stock (` 33,00,000 ` 27,50,000) 5,50,000 Increase in Current Liabilities (` 32,50,000 ` 30,00,000) 2,50,000 Increase in Debtors (` 24,25,000 ` 36,20,000) (11,75,000) Cash Generated from Operations 47,62,400 Less: Income Taxes Paid (WN 3) (2,25,000) Net Cash Flow from / (used in) Operating Activities 45,37,400 B. CASH FLOW FROM INVESTING ACTIVITIES: Purchase of Plant and Machinery (WN 1) (55,85,400) Proceeds from Sale of Machinery (WN 1) 6,25,000 Proceeds from Sale of Investments (WN 2) 4,50,000 Net Cash Flow from / (used in) Investing Activities (45,10,400) C. CASH FLOW FROM FINANCING ACTIVITIES: Issue of Equity Shares at Par 27,50,000 Redemption of Debentures at Premium (` 14,50,000 + ` 1,45,000) (15,95,000) Dividend paid (for Year 2014) (7,50,000) Net Cash Flow from / (used in) Financing Activities 4,05,000 D. Net Increase / (Decrease) in Cash and Cash Equivalents (A+B+C) 4,32,000 E. Cash and Cash Equivalents at the beginning of the year 14,93,000 F. Cash and Cash Equivalents at the end of the year 19,25,000 Nov 2015.6

Question 4(a): Process Costing Equivalent Production Subsequent Process Abnormal Gain ABC Company furnishes you the following information for Process II for the month of April 2015. Prepare: (a) Prepare a Statement of Equivalent Production. (b) Determine the Cost per unit (c) Determine the Value of Work in Process and Units transferred to Process III. Opening Work in Progress Nil Units transferred to Process III 51,000 units Units transferred from Process I 55,000 units at ` 3,27,800 Closing WIP 2,000 units (Degree of Completion): Expenses debited to Process II: Consumables 80%, Labour 60%, Overhead 60% Consumables ` 1,57,200 Units Scrapped 2,000 units, scrapped units were Labour ` 1,04,000 sold at ` 5 per unit. Overhead ` 52,000 Normal Loss 4% of units introduced Similar to Page No.8.25, Q.No.15 of Handbook 1. Statement of Equivalent Production Particulars Input Particulars Output Material A Material B Labour & OH % E.U % E.U % E.U Opg. WIP NIL Transfer to P III 51,000 100% 51,000 100% 51,000 100% 51,000 Transfer in 55,000 Normal Loss 2,200 from P I Abnormal Gain (b/f) (200) 100% (200) 100% (200) 100% (200) Closing WIP 2,000 100% 2,000 80% 1,600 60% 1,200 Total 55,000 Total 55,000 52,800 52,400 52,000 Note: 1. Material A = Brought Forward from Process I, Material B = Consumables introduced in Process II. 2. Normal Loss = 4% of Units Introduced = 50,000 4% = 2,200 Units. 3. Abnormal Gain is taken as 100% complete in all respects, since it represents actual good production. 2. Statement of Cost per Equivalent Unit Cost Element Total Costs Equivalent Units Cost per Equivalent Unit Material A (From P I) 3,27,800 Less: Scrap Value of Normal Loss (11,000) ` 3,16,800 52,800 ` 6 Item Material B (Consumables) ` 1,57,200 52,400 ` 3 Labour ` 1,04,000 52,000 ` 2 Overhead ` 52,000 52,000 ` 1 Total ` 6,30,000 Material A at ` 6/eu 3. Statement of Cost Apportionment Material B at Labour at ` 3/eu ` 2/eu Overhead at ` 1/eu Tfr to Pr III 51,000 6= 3,06,000 51,000 3=1,53,000 51,000 2= 1,02,000 51,000 1 = 51,000 6,12,000 Abnormal Gain (200) 6 = (1,200) (200) 3 = (600) (200) 2 = (400) (200) 1 = (200) (2,400) Closing WIP 2,000 6 = 12,000 1,600 3 =4,800 1,200 2 = 2,400 1,200 1 = 1,200 20,400 Total 3,16,800 1,57,200 1,04,000 52,000 6,30,000 Total Question 4(b): Cost of Capital & Capital Structure Effect of different modes of Financing on Value of Firm RST Ltd is expecting an EBIT of ` 4 Lakhs for F.Y. 2015 16. Presently the Company is financed entirely by Equity Share Capital of ` 20 Lakhs with Equity Capitalization Rate of 16%. The Company is contemplating to redeem a part of the capital by introducing Debt Financing. The Company has two options to raise Debt to the extent of 30% or 50% of the Total Fund. It is expected that for Debt Financing upto 30%, the Rate of Interest will be 10% and Equity Capitalization Rate will increase to 17%. If the Company opts for 50% Debt, then the Interest Rate will be 12% and Equity Capitalization Rate will be 20%. You are required to compute the Value of the Company and its Overall Cost of Capital under different options, and also state which is the best option. Nov 2015.7

Similar to Page No.18.38, Q.No.37 of Handbook Plan Present: 0% Debt Plan 1: 30% Debt Plan 2: 50% Debt Debt Nil ` 6,00,000 ` 10,00,000 Equity Capital (given at Present Level) ` 20,00,000 ` 14,00,000 ` 10,00,000 Total Assets ` 20,00,000 ` 20,00,000 ` 20,00,000 EBIT ` 4,00,000 ` 4,00,000 ` 4,00,000 Less: Interest at 10% & 12% under Plan 1 & 2 ` 60,000 ` 1,20,000 EBT ` 4,00,000 ` 3,40,000 ` 2,80,000 K e 16% 17% 20% Value of Equity (E) = EBT K e ` 25,00,000 ` 20,00,000 ` 14,00,000 Add: Value of Debt (D) (taken at Book Value) ` 6,00,000 ` 10,00,000 Value of Firm = V = (E + D) ` 25,00,000 ` 26,00,000 ` 24,00,000 K o = WACC = EBIT Value of Firm 16.00% 15.38% 16.67% Inference: The Firm should opt for Plan 1, i.e. 30% Debt, being the Optimum Capital Structure. This is the point at which WACC is minimum, and Value of the Firm is maximum. Question 5: Various Chapters Theory Questions (a) (b) (c) (d) Question State the Method of Costing and also the Unit of Cost for the following industries: (i) Hotel (ii) Toy Making (iii) Steel (iv) Ship Building How would you account for Idle Capacity Cost in Cost Accounting? Distinguish between NPV and IRR Methods for evaluating projects. What is meant by Venture Capital Financing? State its various methods. Answer Reference Page No.1.16, Para 1.4.2 Point Method of Costing Unit of Cost (i) Operating Guest Days, Room Days (ii) Batch Per Batch (iii) Process Per Tonne (iv) Contract Per Ship 4 X 4 = 16 Marks Answer: Refer Page No.4.9, Para 4.3.4 of Handbook For Question Refer: Page 4.37, Q.No.24 of Practical Guide, RTP, N 83, M 97, N 01, M 09 Qn. Answer: Refer Page 20.7, Para 20.2.7 & 20.2.10 of Handbook Answer: Refer Page No.21.7, Para 21.3.9 of Handbook For Question Refer: Page 21.2, Q.No.17 of Practical Guide RTP, N 02, M 05, N 07, N 08, M 09, M 10, M 13 Qn Question 6(a): Contract Costing Estimation of Total Profit PVK Constructions commenced a Contract on 1 st April 2014. Total Contract Value was ` 100 Lakhs. The contract is expected to be completed by 31 st December 2016. Actual Expenditure during the period 1 st April 2014 to 31 st March 2015 and estimated expenditure for the period 1 st April 2015 to 31 st December 2016 are as follows: Particulars Actual (`) Estimated (`) Period 1 st April 2014 to 31 March 2015 1 st April 2015 to 31 st December 2016 Material issued 15,30,000 21,00,000 Direct Wages Paid 10,12,500 12,25,000 Direct Wages Outstanding 80,000 1,15,000 Plant Purchased 7,50,000 Expenses Paid 3,25,000 5,40,000 Prepaid Expenses 68,000 Site Office Expenses 3,00,000 Nov 2015.8

Part of the Material procured for the contract was unsuitable and was sold for ` 2,40,000 (cost being ` 2,55,000) and a part of Plant was scrapped and disposed off for ` 80,000. The value of Plant at site on 31 st March 2015 was ` 2,50,000 and the value of Materials at site was ` 73,000. Cash received on account to date was ` 36,00,000, representing 80% of the Work Certified. The Cost of Work Uncertified was valued at ` 5,40,000. Estimated further expenditure for completion of contract is as follows: (i) An additional amount of ` 4,62,500 would have to be spent on the Plant, and the Residual Value of the Plant on the completion of the contract would be ` 67,500. (ii) Site Office Expenses would be the same amount per month as charged in the previous year. (iii) An amount of ` 1,57,500 would have to be incurred towards Consultancy Charges. Required: Prepare Contract Account and calculate the Estimated Total Profit on this contract. Similar to Page No.6.27, Q.No.11 of Handbook [M 07 Qn] 1. Statement of Current & Total Profits Particulars Till date Additional Total A. Income: Work Certified 36,00,000 = 45,00,000 80% Given = 1,00,00,000 Work Uncertified Given = 5,40,000 Total 50,40,000 1,00,00,000 B. Expenditure: Materials (WN a) 12,02,000 21,73,000 33,75,000 Labour (WN b) 10,92,500 12,60,000 23,52,500 Expenses (WN c) 2,57,000 6,08,000 8,65,000 Depreciation (WN d) 4,20,000 6,45,000 10,65,000 Site Office Expenses 3,00,000 (3,00,000 21/12)=5,25,000 8,25,000 Consultancy (Given) 1,57,500 1,57,500 Total 32,71,500 50,68,500 86,40,000 C. Profit (A B) 17,68,500 Notional Profit 13,60,000 Estimated Total Profit Working Notes for above Statement: Particulars Upto 31 st March 2015 1 st April 2015 to 31 st Dec. 2016 (a) Materials Consumed (b) Labour Cost incurred (c) Expenses (d) Depreciation (See Note) Opg Stock+Issues Closing Stock Cost of Sales = Nil + 15,30,000 73,000 2,55,000 = 12,02,000 Paid + O/S at end = 10,12,500 + 80,000 = 10,92,500 Paid Prepaid at end = 3,25,000 68,000 = 2,57,000 Cost Disposed Residual Value = 7,50,000 80,000 2,50,000 = 4,20,000 Nov 2015.9 Opening Stock + Issues Closing Stock = 73,000 + 21,00,000 Nil = 21,73,000 Paid during the year + O/S at end O/S at beginning = 12,25,000 + 1,15,000 80,000 = 12,60,000 Prepaid of prev. period + paid during the year = 5,40,000 + 68,000 = 6,08,000 Opening Value + Purchases Residual Value = 2,50,000 + 4,62,500 67,500 = 6,45,000 Note: It is assumed that Plant scrapped and disposed off for ` 80,000 is at cost. Hence, Loss / Gain thereon is ignored. 2. Contract Account for the year ending 31 st March 2015 Particulars ` Particulars ` To Material Consumed 12,02,000 By Work in Progress To Labour (Paid + O/s) 10,92,500 Work Certified 45,00,000 To Expenses (Paid Prepaid) 2,57,000 Work Uncertified 5,40,000 To Depreciation 4,20,000 To Site Office Expenses 3,00,000 To Notional Profit c/d 17,68,500 Note: Total 50,40,000 Total 50,40,000 Contract Account can also be prepared by alternative presentation, with respect to Materials, Plant, etc. In the absence of information as to recognition of Profit, the 2 nd and 3 rd segments of Contract A/c are not prepared.

Question 6(b): Working Capital Management Debtors Factoring vs Bank Finance A Firm has a total sales of ` 200 Lakhs of which 80% is on credit. It is offering credit terms of 2/40, net 120. Of the total, 50% of customers avail of discount and the balance pay in 120 days. Past experience indicates that Bad Debt losses are around 1% of Credit Sales. The Firm spends about ` 2,40,000 per annum to administer its credit sales. These are avoidable as a Factor is prepared to buy the Firm s Receivables. He will charge 2% Commission. He will pay Advance against Receivables to the Firm at an Interest Rate of 18% after withholding 10% as Reserve. (i) What is the Effective Cost of Factoring? Consider year as 360 days. (ii) If Bank Finance for Working Capital is available at 14% Interest, should the Firm avail of factoring service? Notes: Similar to Page No.16.49, Q.No.34 of Handbook [M 09 Qn] Credit Terms 2/40 net 120 is the general credit policy of the Company, irrespective of Factoring Arrangement. Hence, cost of Discount Allowed is not considered in the computations. Weighted Average Collection Period = (50% 40 days) + (50% 120 days) = 80 days. 1. Computation of Effective Cost of Factoring Particulars Computation ` 1. Average Debtors = Annual Credit Sales Credit Period 80 ` 200 Lakhs 80% 360 35,55,556 2. Reserve at 10% on Debtors 10% on ` 35,55,556 3,55,556 3. Amount of Finance (i.e. Amt on which Interest is computed) (1 2) 32,00,000 4. Interest thereon at 18% (for 80 days) 80 ` 32,00,000 18% 360 1,28,000 5. Commission at 2% on Debtors 2% on ` 35,55,556 71,111 6. Total Cost of Factoring, for 80 days = Commission + Interest (4 + 5) 1,99,111 7. Amount received by the Firm from the Factor= (3 4 5) Note: This is the Average Liability to the Factor, throughout the year. (3 4 5) 30,00,889 360 360 8. Annual Total Cost of Factoring = (Interest + Commission) (4 + 5) 80 80 8,96,000 9. Effective Cost of Factoring p.a. = (8) (7) 8,96,000 30,00,889 29.86% 2. Comparison with Bank Finance for Working Capital Particulars Computation ` (a) Bad Debts at 1% on Credit Sales ` 200 Lakhs 80% 1% 1,60,000 (b) Interest on Average Debtors at 14% 80 ` 160 Lakhs 14% 360 4,97,778 (c) Credit Administration Costs Given 2,40,000 Total Costs per annum 8,97,778 Conclusion: Annual Cost of Factoring (` 8,96,000) is marginally less than Annual Cost of Bank Working Capital (` 8,97,778). Hence, Factoring System may be preferred. Question 7: Various Chapters Theory Questions Answer any four of the following: Question Answer Reference (a) (b) (c) (d) Explain the treatment of over and under absorption of Overheads in Cost Accounting. Describe the various steps involved in adopting Standard Costing System in an organization. Evaluate the role of Cash Budget in effective Cash Management System. Discuss the Risk Return considerations in financing Current Assets. Nov 2015.10 4 X 4 = 16 Marks Answer: Refer Page No.4.12, Para 4.3.12 of Handbook. For Question, Refer: Page 4.38, Q.No.32 of Practical Guide RTP, M 86, N 89, M 94, N 98, M 04, M 06, M 10 Qn Answer: Refer Page No.10.2, Para 10.1.4,5 of Handbook. For Question, Refer: Page 10.34, Q.No.4 & 5 of Practical Guide N 74, N 75 Qn. Answer: Refer Page No.16.9, Para 16.2.8 of Handbook. For Question, Refer: Page 16.49, Q.No.22 of Practical Guide. Answer: Refer Page No.16.21, Para 16.4.3 of Handbook. For Question, Refer: Page 16.49, Q.No.51 of Practical Guide N 04 Qn

(e) Question Distinguish between the following: (i) Scraps and Defectives in Costing (ii) Preference Shares and Debentures Answer Reference Answer: Refer Page No.2.30, Para 2.5.13 of Handbook. For Question, Refer: Page 2.32, Q.No.80 of Practical Guide Answer: Page No.21.2, Para 21.2.2 and Page No.21.4, Para 21.3.1 of Handbook. Nov 2015.11

STUDENTS NOTES Nov 2015.12